1. Determine the initial net cash outflow for this project.

2. Determine the net cash flows (years 1 to 7 ) if the new pellet mills are g chased.

3. Calculate the NPV for the pellet mill project.

4. Calculate the IRR for the pellet mill project.

5. What is the payback for the pellet mill project?

6. Should AGC invest in the new pellet mills?

7. For what reasons besides those presented in this case might this project unacceptable?

8. How would you respond if a member of the divisional budget commit made the comment at the end of your presentation that he was against  project because it only made a profit of $35,000?

   

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AMERICAN GRAIN COMPANY EQUIPMENT REPLACEMENT Most corporations have standard procedures for the submission of capital budgeting requests. These requests include a detailed enumeration of all costs involved. Capital budgeting is normally done on an annual basis and the requests from the various operating units are compiled to determine the total amount of the capital requests for the year. Each project and its estimated future cash flows are analyzed by a capital budgeting committee, and in many cases the operating unit managers must justify the rationale behind the estimates. American Grain Company (AGC) is a multinational firm with total revenues in excess of $5 billion per year. The firm is made up of four major divisions and each division must submit its annual capital budgeting requests to AGC head- quarters in Minneapolis by May 15. Michael Paschall is the plant manager at AGC's pet food plant in Louisville. The plant produces both wet and dry food for a wide variety of pets, from tropical fish to greyhounds. Michael's job includes determining the capital needs of the plant and preparing the capital request. At this time he is preparing a capital request for a new pellet mill system that will increase his plant's productivity. PRODUCTION OF DRY PET FOOD At the Louisville plant, the dry pet food pellets are produced through an extru- sion process. The process begins with the grinding of all grains into a meal; the different grains are then mixed with other ingredients, including vitamins, in 3-ton mixers. Each 3-ton mix is called a batch. The process is not unlike what an individual would do when making a batch of pancake mix or bread dough. AMERICAN GRAIN COMPANY EQUIPMENT REPLACEMENT Most corporations have standard procedures for the submission of capital budgeting requests. These requests include a detailed enumeration of all costs involved. Capital budgeting is normally done on an annual basis and the requests from the various operating units are compiled to determine the total amount of the capital requests for the year. Each project and its estimated future cash flows are analyzed by a capital budgeting committee, and in many cases the operating unit managers must justify the rationale behind the estimates. American Grain Company (AGC) is a multinational firm with total revenues in excess of $5 billion per year. The firm is made up of four major divisions and each division must submit its annual capital budgeting requests to AGC head- quarters in Minneapolis by May 15. Michael Paschall is the plant manager at AGC's pet food plant in Louisville. The plant produces both wet and dry food for a wide variety of pets, from tropical fish to greyhounds. Michael's job includes determining the capital needs of the plant and preparing the capital request. At this time he is preparing a capital request for a new pellet mill system that will increase his plant's productivity. PRODUCTION OF DRY PET FOOD At the Louisville plant, the dry pet food pellets are produced through an extru- sion process. The process begins with the grinding of all grains into a meal; the different grains are then mixed with other ingredients, including vitamins, in 3-ton mixers. Each 3-ton mix is called a batch. The process is not unlike what an individual would do when making a batch of pancake mix or bread dough.

Answer rating: 100% (QA)

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